The dividend yield is the easiest of the measures to calculate, and it is typically provided to you as part of a stock quote by sites like Yahoo Finance or MSN money. First I’ll explain what dividend yield is and then I will explain (and show) how to calculate it.
The definition of dividend yield provided by Investopedia is “A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. ” If were an inexperienced investor, even this definition for what should be a simple concept would be enough to scare me. It’s amazing how finance people try to make everything seem more complicated than it really is. If they can find a way to use a 14 letter word instead of a 5 letter word, they will!
What the above definition is saying is the dividend yield can be calculated by dividing the annual dividend per share by the share price. I will use one of my favorite stocks Apple Inc (AAPL) as an example. As of the close of business on Friday May 12, 2017, AAPL traded at $156.07 dollars per share. It pays out $2.52 per share in dividends per year. That means the dividend yield can be calculated as follows:
2.52/156.07 = 0.016147
0.016147 * 100 = 1.6147%
The reason we multiply the number by 100 is because percent literally means per 100 so the value we get has to be multiplied by 100 to get the whole amount, otherwise we just get 1%.
Using dividend yield in decision making
So now you may thinking “it’s great I know how to calculate dividend yield, but how do I use it?” When investing in dividend stocks, you can’t simply use the total amount of dividends paid because a stock with a higher price could have a higher payout but actually a lower percentage, this means you are getting less dividend back for the money you spend. As an example, I will compare Ford (F) and Apple (AAPL). Both of these values are as of the close of business on May 12, 2017 and the percentages are calculated using the above formula.
AAPL stock price = 156.07
AAPL dividend payout = 2.52
AAPL dividend yield = 1.6147%
F stock price = 10.93
F dividend payout = .60
F dividend yield = 5.4895%
By only looking at the yearly payouts, Apple looks much better than Ford, but surprise, Ford actually pays a higher percentage than Apple. This means that if you spent the same amount of money on both Ford and Apple stock, Ford would actually pay you more. Go ahead try it for yourself!
The dividend yield is a great tool for doing a quick comparison, but this is far from the only tool we will use in our analysis, since even bad companies can have a high dividend yield. The next post will look at dividend growth, so check back often, and as always feel free to email me or post a comment with any questions or suggestions you have.